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for
ECONOMIC PERFORMANCE
OCCASIONAL PAPER NO. 13
November 1997
OPEN MACROECONOMICS IN AN OPEN ECONOMY
Edward Balls
ABSTRACT
There are three pillars of the new Labour Government’s approach to
economic policy: delivering macroeconomic stability, tackling the supplyside barriers to growth and delivering employment and economic
opportunities to all. This lecture focuses on the reforms the new
government has introduced in order to deliver macroeconomic stability and
why open and transparent institutions and procedures are central to those
reforms.
The lecture sets out four principles for macroeconomic policymaking
which flow from changes in the world economy and the world of economic
ideas over the past twenty or thirty years. These are:
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the principle of stability through constrained discretion
the principle of credibility through sound, long-term policies
the principle of credibility through maximum transparency
the principle of credibility through pre-commitment
The lecture explains each principle in turn and shows how they are being
translated into practice in the macroeconomic policy reforms that the new
government is introducing at the Treasury and the Bank of England —
reforms which add up to what is now probably one of the most open and
accountable system of economic policymaking in the world.
The Centre is pleased to include this lecture among its Occasional
Papers as a contribution to the macro-economic debate. The lecture is
the Scottish Economic Society/Royal Bank of Scotland Annual Lecture
and the author is the Chancellor of the Exchequer’s Economic Adviser.
OPEN MACROECONOMICS IN AN OPEN ECONOMY
Edward Balls
NOVEMBER 1997
Published by
Centre for Economic Performance
London School of Economics and Political Science
Houghton Street
London WC2A 2AE
© Edward Balls, 1997
ISBN 0 85328 588 8
OPEN MACROECONOMICS IN AN OPEN ECONOMY
Edward Balls
Page
1.
2.
Labour’s Economic Approach —
Stability, Growth, Opportunity
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Four Principles of Open Macroeconomic Policy
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I.
II.
III.
IV.
3.
4.
Stability Through Constrained Discretion
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Credibility Through Sound Long-term Policies
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Credibility Through Maximum Transparency
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Credibility Through Pre-commitment
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Principles Into Practice —
The New UK Macroeconomic Framework
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Conclusion
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Endnotes
References
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The Centre for Economic Performance is financed by the Economic and
Social Research Council.
ACKNOWLEDGEMENTS
The first draft of this lecture was delivered, under Chatham House rules,
on the occasion of the annual meeting of the Scottish Economic Society in
Edinburgh on 22 October 1997. This revised version is being circulated as
an LSE Centre for Economic Performance Occasional Paper. It will be
published in the forthcoming volume of the Scottish Journal of Political
Economy. The author is grateful to the following colleagues for helpful
comments: Sir Terry Burns, Sir Alan Budd, Professor Mervyn King, Gus
O’Donnell, Andrew Likierman, Andrew Kilpatrick, Professor Richard
Layard, Peter Curwen, Ed Miliband and Ben Kelmanson.
OPEN MACROECONOMICS IN AN OPEN ECONOMY
Edward Balls
1.
LABOUR’S ECONOMIC APPROACH
GROWTH, OPPORTUNITY
—
STABILITY,
It is a great pleasure, and an honour, to be here in Edinburgh to give the
fourth Scottish Economic Society/Royal Bank of Scotland lecture, the
thirty-third in the Society’s annual lecture series. I would like to express
my thanks to the society for the invitation and to the Royal Bank of
Scotland for their kind hospitality.
Founded in 1897, this society has a fine tradition of one hundred
years of scholarship and discussion — as you would expect in a country
which can boast Adam Smith and David Hume as two of Scotland’s great
economist ancestors.
It has been a hectic few months since the general election on May 1st,
but also a significant period for the new direction in economic
policymaking that the incoming Labour Government has taken.
Thankfully, it is still too early to apportion praise or blame. But it is
not too early to justify and explain. In just a few short months, the new
government has made a number of changes in the institutions and practice
of economic policymaking in Britain:
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independence for a reformed Bank of England
a new structure of financial regulation
new fiscal rules and a five year deficit reduction plan
a major corporate tax reform
a windfall tax on the privatised utilities
a New Deal for the young people and the long-term unemployed
reform of the financing of higher education
a new capital fund to rebuild schools
a UK Action Plan and for Employment and Flexibility in Europe
publication of Lord Currie’s EMU paper and a new Advisory
Taskforce
and new impetus for debt relief — the Mauritius Mandate
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That list is, by no means, exhaustive. And there is more to come:
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the Bank of England Bill
the first National Assets Register
a Pre-Budget Report and economic consultation process
capital gains tax reform
consultation on the new Individual Savings Account
tough legislation on competition policy
the Taylor review of taxes and benefits
and the Low Pay Commission’s report on the minimum wage
I cannot hope to cover in detail tonight the principles which underpin
such a wide range of economic policy initiatives — certainly not in one
sitting.
Which is why, tonight, I will focus on the reforms the new
government has introduced in order to deliver macroeconomic stability and
why open and transparent institutions and procedures are central to those
reforms.
The institutional changes which have been introduced since May 1st
at the Treasury and the Bank of England, in some cases only a few days
after election day, add up to what is now probably one of the most open
and accountable system of economic policymaking in the world.
Tonight I will try to explain the central importance that the
Chancellor places on openness, transparency and the institutional
framework in order to deliver the government’s wider economic
objectives.
I will argue that the changes in both the world economy and our
economic understanding of it over the past twenty years mean that
policymakers must adjust to new ways of making decisions. Gone are the
days of fixed policy rules announced in public and of private deliberations
behind closed finance ministry doors, with little or no justification or
explanation about policy decisions or mistakes.
Instead I will argue that new principles must guide decision-making
and institutional design and show how these principles underpin New
Labour’s macroeconomic policy reforms — in monetary and fiscal policy.
The argument that I will make is that, in a world of global capital markets
in which policymaking by fixed rules has been discredited in theory and
practice, governments must take a different route to ensuring
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macroeconomic credibility. Credibility in modern open economies requires
three ingredients:
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a reputation for following sound long-term policies
maximum openness and transparency
and new institutional arrangements which guarantee a long-term
view
In the UK’s case, the particular nature of the new government’s
inheritance in May of this year, and the difficulties of being a new
government after 18 years of opposition, make greater openness and
transparency doubly important.
But I believe that these principles, which stress the importance of
open macroeconomic policymaking, would apply to any small or medium
sized open economy. Indeed, the UK has recently proposed at the recent
IMF and World Bank meetings in Hong Kong that the IMF draw up a code
of conduct on openness and transparency — a proposal which found favour
with other finance ministers, and which the IMF is now developing. 1
So tonight “Open Macroeconomic Policy in an Open Economy” is
my theme. But before I turn to it, I first want to explain how
macroeconomic stability fits into Labour’s overall economic approach.
Macroeconomic stability — low and stable inflation and sound
public finances — is only an instrumental aim — a means to an end. The
aim of New Labour economics, as set out in the Chancellor’s May 6th
letter to the Governor of the Bank of England2 and reconfirmed in the
Treasury’s new draft Aim is not simply to ensure low and stable inflation
and sound public finances but to deliver high and stable levels of growth
and employment by ensuring economic and employment opportunities for
all. Growth, jobs and fairness are the tests against which this government
will be judged.
Delivering on these objectives depends not simply on one policy
pillar, but three — delivering macroeconomic stability, tackling the supplyside barriers to growth and delivering employment and economic
opportunities to all.
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The Chancellor’s Mansion House and Budget speeches made clear
that stability — low inflation and sound public finances — is an essential
pre-condition for achieving higher levels of growth and employment. 3
The violent boom-bust economic cycles of the past twenty or so years
— more extreme than in any other major developed economy — have had
a serious negative impact, not simply on jobs during the recessions, and on
long-term interest rates because of higher inflation expectations, but on the
employability of the long-term unemployed, the capacity of the economy
and the willingness of companies to make long-term investment
commitments. As Keynes might say now, there is nothing so damaging for
the “animal spirits” of business investors than repeated cycles of boom then
bust.
Sustained stability is necessary for investment. But a strong economy
is also necessary to make stability sustainable. The UK will only be able
to deliver and sustain stable economic growth and employment if we have
a strong, productive, wealth-creating economy which can generate both
jobs and rising incomes. The inflation of the late post-war period was as
much a symptom of a depressed growth potential, and the struggle to get
a share of a slower growing cake, as it was of macroeconomic policy
errors.
So while stability is the first pillar of New Labour economics,
supply-side action to make the economy more dynamic and remove barriers
to growth is the second pillar.
That means understanding that the proper role for government in
economic policymaking goes well beyond macroeconomic policymaking.
It means a new role for government — not picking winners or
responding to market failures by trying to replace the market in its entirety,
but using the proper role of government to tackle short-termism and
market failures by making markets work more dynamically and
encouraging investment in the broadest sense — not just in machines, but
in technology and innovation, skills and infrastructure — the fuel for
growth in the modern economy.
The need to reorient public spending to promote growth, jobs and
fairness infuses the whole Comprehensive Spending Review process which
all departments are currently engaged in to re-shape public spending for the
next century.
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But the new growth agenda goes beyond public spending into all
areas where either the wrong kind of government, or the absence of
government creates barriers to growth. I hesitate to label this new growth
theory — but over the past ten years, following the pioneering work of
Paul Romer, the theory of economic policy has been replacing the old idea
of exogenous technological change as the main driver of economic growth
with a much more sophisticated role for governments: in tax policy,
competition policy, corporate governance, support for small business,
regional development agencies and education and training. 4
Without stability, this long-term project of raising the economy’s
growth potential cannot get off the ground. But it is only by taking action
to tackle barriers to growth that we can avoid the mistakes of the past —
attempts at maintaining stability which lead to conflict and unemployment.
It is the unemployed who have lost most from the instability and slow
growth of recent decades.
The third pillar of the new government’s economic policy — the key
to ensuring stability and growth is translated into high and stable levels of
employment as well as rising incomes for those in work — is to actively
promote employment opportunity and reform the welfare state so that it
promotes work not dependency. The centrepiece of the first Budget was a
new approach to employment opportunity for young people, the long-term
unemployed, lone parents and the disabled — on a scale and in a manner
never attempted before. The New Deal is now at the stage of detailed
planning for implementation next Spring. The reform of the tax and
benefits system to reward and encourage employment is now, as the
Chancellor has said, a live issue for the next Budget. And encouraging
higher standards and wider access in education, particularly after 16, is a
major aim of the government. Only by providing the skills for work, a tax
and benefit system which rewards work, and new opportunities for the
long-term unemployed to return to work can government translate stability
and growth into high levels of employment.
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FOUR PRINCIPLES OF OPEN MACROECONOMIC POLICY
Let me now turn to my theme. For while macroeconomic stability may not
be sufficient to deliver the government’s growth and employment
objectives, it is certainly a necessary goal — and one which has eluded
British governments for many years.
The institutional changes to macroeconomic policymaking which the
government has taken since May of this year represent an important
advance towards ensuring long-term stability. The fact that long-term
interest rates, measured by the ten year benchmark government bond, have
fallen from 7.4 per cent to 6.6 per cent since the day before the election and
the spread over German ten year government bonds has narrowed from 191
basis points to 87 points over the same period, is an encouraging sign that
I am not the only one to take this view.5 That the inflation expectation
implicit in index-linked ten year gilts remains at 3.2 per cent, albeit down
from 3.8 per cent on May 1st, shows we still have some way to go. In
modern economic policymaking, outcomes speak louder than reforms.
Tonight I want to set out four principles for macroeconomic
policymaking which seem, to me at least, to flow logically from changes
in the world economy and the world of economic ideas over the past
twenty or thirty years. I am not going to indulge in an orgy of academic
history, and a list of references — this is not the right place for that and I
would be bound to miss out someone important. I want, instead, to root
this political economy analysis in the world of macroeconomic
policymaking by showing how these four principles are being translated
into practice in the macroeconomic policy reforms that the new
government is introducing.
I will not pretend that these four principles are mutually supportive
— if only life were so simple. Indeed, the motivation for institutional
change is, in part, an attempt to reconcile conflicts between them.
I will call them:
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the principle of stability through constrained discretion
the principle of credibility through sound, long-term policies
the principle of credibility through maximum transparency
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the principle of credibility through pre-commitment
And I will try to explain and justify each one in turn.
I.
Stability Through Constrained Discretion
The first principle is the simplest way I could think of to embody the prostability but post-monetarist intellectual consensus upon which modern
macroeconomic policymaking is based.
Before I re-declare the death of monetarism in our time, let me first
recognise the debt of gratitude we all share towards Milton Friedman, the
father of monetarism, doyen of right-wing libertarian populists, but also
one of the great US post-war economists. I first realised that the world was
more complicated than the sterile and over-ideological “Keynesians v
Monetarists” essays that I wrote as an undergraduate, when — in my first
week at the Harvard Economics Department, Professor Greg Mankiw —
doyen of the young New Keynesians — eulogised Milton Friedman to the
new graduate class. (He had already made clear that there was no doubting
his credentials — even Mankiw’s dog was called Keynes.)
I quickly realised the intellectual dominance not only of Friedman’s
work on consumption functions in the 1950s, but of his 1968 American
Economic Association Presidential lecture in which, with his vertical
expectations-augmented Phillips Curve, he demolished the idea of a longrun trade-off between inflation and unemployment.
Which is not, of course, to agree with those who concluded in the
1970s that, because people’s expectations are entirely rational and
forward-looking, there is not even a short-run trade-off between the
unemployment and inflation, or that there is a “natural rate” of
unemployment which is not affected by macroeconomic policy. What
clearer evidence could there be of the short-run trade-off between reducing
inflation and rising unemployment, or the persistent effect this can have in
the form of long-term unemployment, than Britain’s 1980-81 recession.
So severe a long-term cost, indeed, that, when inflation accelerated in the
late 1980s Lawson boom, long-term unemployment remained twice as high
as at the previous cyclical peak.
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In fact, this late 1980s experience — persistent mass unemployment
alongside accelerating inflation — serves to make Friedman’s 1968 point:
an expansionary monetary and fiscal policy mix cannot, in and of itself,
deliver, let alone sustain, full employment. Indeed, excessive
macroeconomic expansions — which allow inflation to run out of control
and then be forcibly restrained — end up involving a long-term price in
higher unemployment, a “hysteresis” effect as it was called in the late
1980s.6
Enough, though, of Milton Friedman’s intellectual triumphs. What
I have said earlier about the modern role of government in tackling market
failure and countering short-termist or irrational expectations in markets
is already enough to indicate little enthusiasm for Friedman’s libertarian
free-marketism — “broad monetarism” if you like. But it was also
Friedman’s “narrow monetarist” ideas about the stability of the link
between the money supply and inflation which, when taken to such an
extreme by the Conservative Government in the early 1980s that even
Friedman himself was horrified, were responsible for such macroeconomic
errors.
With hindsight, the story of the early 1980s is simple enough. What
had seemed to be a stable relationship between money and inflation
collapsed with the beginning of financial deregulation in 1979. The growth
rate of M3 shot out of its target range and stayed there, even after inflation
had begun to fall.7
But the then government persisted with a policy of high interest rates
and high exchange rate, in a continuing attempt to meet its rigid monetary
targets, at the expense of a deep recession. By 1982, it was clear that
monetary targets were not a useful guide for monetary policy, although the
government persisted in setting targets for a range of indicators until 1985.
And Nigel Lawson’s flirtation with exchange rate targets in 1987 and 1988
and the debacle of Britain’s membership of the Exchange Rate Mechanism
both had similar narrow monetarist undertones — attempts to achieve low
inflation by clinging doggedly to intermediate indicators which appeared
to have been associated with inflation in past times or places, but which
now implied perverse policy mixes.
I said I would re-declare the death of monetarism. For, in the actions
of central banks across the developed world, this death is declared daily and
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monthly. Maintaining low and stable inflation — not too high, not too low
— is an increasingly accepted goal of monetary policy around the
developed world. Indeed, an increasing number of governments and central
banks now adopt inflation targets. But using fixed intermediate monetary
targets to achieve this low inflation goal is no longer common practice. No
major central bank now uses money supply targets as rigid policy rules, as
opposed to using them as one source among a number of sources of
economic information. Economic judgement now rules the day, not blind
observance of monetary or exchange rate rules.
The reason is twofold.
First, fixed intermediate targets rely on stable money demand
functions. But financial deregulation, changing technology and widening
consumer choice have delivered such instability in money demand
functions that fixed monetary rules have proved unworkable — not just in
the UK, but in the US and Germany too. For, while modern open economy
macroeconomics says that demand shocks should not be accommodated —
the underlying case for fixed intermediate policy rules — these rules break
down as a guide to the correct policy response if the money demand
function itself breaks down. No-one could accuse the first Conservative
Government of accommodating inflationary pressures in 1979 and 1980.
In retrospect, domestic monetary policy was too tight during this period.
But, according to the government’s own monetary targets which were
consistently over-shot by the accelerating demand for broad money, policy
was too loose. If monetary targets had ever been a reliable guide to
policymaking in the UK, they had certainly become redundant by the time
they were put to the test.
But second, fixed intermediate targets rely not only on stable money
demand but also on the assumption that demand shocks are predominant
while shocks to supply are both infrequent and easily recognisable. While
standard macroeconomics recommends keeping money supply growth
steady in the face of demand shocks, assuming a stable money demand
function, to do so in the face of a large supply shock would mean a heavy
and unnecessary price in terms of lost output — which is why the standard
economic response to a supply-shock is to use monetary and fiscal policy
to accommodate its direct effects on the price level, again over-riding any
fixed intermediate monetary target. If the aim of policy is to stick to the
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policy rule, then stick to the policy rule. But if the aim of policy is to keep
inflation low and stable, and growth as high and stable as possible, then the
policy rule is again redundant.
So this is the first principle — stability through constrained
discretion8: stability and low inflation is a necessary condition for
achieving and sustaining high and stable levels of growth and employment,
but achieving stability requires the discretionary ability for macroeconomic
policy to respond flexibly to different economic shocks — constrained, of
course, by the need to meet the low inflation objective or target over time.
But if the need for discretion was so straightforward, then why the
attraction in fixed monetary targets in the first place?
Were monetarist governments in the early 1980s simply putting faith
in an empirical relationship which had by then broken down? In which case,
if the monetarist belief in fixed policy rules can simply be replaced by our
first principle, then macroeconomic policymaking would once more
become a straightforward — if technical — task. The Chancellor could sit
back, take the advice of his officials and perhaps other experts in private,
then simply make decisions which outsiders could observe and, if they so
desired, try to rationalise — stability, if you like, through private
discretion.
But the answer, of course, is that governments were trying to achieve
something more than a simple and automatic rule for monetary
policymaking. That extra something was credibility. Credibility is the
elusive elixir of modern macroeconomics, and also the subject of the first
Scottish Economic Society/Royal Bank of Scotland lecture given by
Professor Mervyn King, then Chief Economist and now Deputy GovernorElect of the Bank of England.9
In that lecture, King defines credibility as “a question of whether
announced intentions are believable”. It is not simply a matter of trust —
read my lips: no more inflationary booms — but, he says, of whether the
monetary authorities face an incentive to pursue low inflation. Or to use
economics jargon, to make policymaking “time consistent” by ensuring that
the government actually has an incentive to achieve the goals in the future
what it says now it wants to achieve in the future.
Monetarism, then, was not simply an empirical fact at one extreme,
or a free-market dogma at the other. It was also a reaction against post-War
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discretionary macroeconomic policymaking which became popular in the
academic literature in the late 1970s and early 1980s in the guise of the
“new classical” or “rational expectations” movement in macroeconomics
which followed Friedman’s seminal presidential lecture.10
An incoming government might declare that it wanted to achieve low
inflation, but this goal was “time inconsistent” — when it came to preelection time, the government’s incentive would always be to cheat and
dash for growth, knowing that the resulting recession would only come
along later. But, as Friedman pointed out, the result of trying to exploit this
short-term trade-off between unemployment and inflation was simply to
build in higher inflation expectations (and therefore higher long-term
interest rates) with no long-term gain in terms of output or employment —
indeed possibly higher unemployment and lower investment if the resulting
recession had lasting effects.
So policymakers needed to look for ways to deny themselves the
temptation of using “discretion” to cheat on electorates by saying they were
committed to low inflation, but then privately by trading a little more
inflation for a little less unemployment. The monetarist answer to this
problem of “time inconsistency” was to buy credibility — and therefore
lower inflation expectations and lower long-term interest rates — by “tying
the government’s hands” and removing discretion from policymaking —
thereby increasing both trust in the government’s long-term goals and in the
government’s commitment to operate policy to achieve those goals.
The problem, as I have shown, was that the actual result was quite the
opposite. As the UK experience shows, persisting with fixed monetary
rules, as monetary aggregates ran out of control was disastrous. Because
the government had staked its anti-inflationary credentials on following
these rules, it — and the economy — was immediately faced with paying
a heavy price for breaking them — not simply in lost output but also lost
credibility. As one rule after another proved unsustainable and was
replaced by the next, not only were the government’s anti-inflationary
credentials weakened, but it took its eye off the ball to such an extent that
the information that the double digit growth of M4 did transmit from the
mid-1980s onwards was not given the attention it was due.
Nor did the attempt, at the beginning of this decade, to maintain
credibility though the ERM fare much better. Linking the anti-inflationary
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commitment to a fixed exchange rate target at a time when the unification
supply-shock was pulling the anchor currency — the D-Mark — in a
direction which most other countries and certainly Britain were not in a
position to go, guaranteed that the right economic decisions were not taken
and then, when economics proved too much and the nominal anchor broke,
the government was left with the credibility of its long-term goals
undermined.
This is the lesson of our ERM failure: trying to achieve credibility
through sticking to fixed and rigid intermediate policy rules is
destabilising, as the principle of stability through constrained discretion
suggests. But that does not mean that we can reject the need for credibility
in the government’s commitment to its declared goals or ignore the conflict
between credibility and discretion which Friedman and his followers
highlighted. So what is the modern route to credibility which preserves
discretion? My remaining three principles pick up three different ways in
which the world makes private discretion more difficult or costly — and
focuses on how long-term, open, transparent and devolved decision-making
provides a better alternative route to goal credibility than fixed monetary
or exchange rate rules.
II.
Credibility Through Sound Long-term Policies
The rapid globalization of the world economy has made achieving
credibility more rather than less important, particularly for an incoming
left-of-centre government which has been out of power for two decades.
This process of globalization has many dimensions — technological
change, capital market liberalisation and the growth and global reach of
international trade — all of which have profound implications for
domestic economic policy. No sensible discussion of New Labour’s
economic policy could avoid a lengthy discussion of how technological
change and the growth of world trade have affected labour market
outcomes. While macroeconomic policy errors are one central cause of the
rise and persistence of unemployment in the 1980s, the concentration of
long-term unemployment among the unskilled demonstrates that changes
in the global pattern of demand and supply are another.
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For macroeconomic policymaking, there can be no doubt that the
most significant change in the world economy is the globalization of
international capital markets which began before the collapse of the
Bretton Woods system of global fixed exchange rates and, spurred on by
liberalisation and technological change, has accelerated apace since.
The power of “the markets” is always and everywhere: dollar slumps
on bad trade news, D-Mark rises on good inflation news, or, as the Wall
Street Journal once reported in its headline, Dow-Jones falls on no news.
Global capital markets have intensified the “time inconsistency”
problem. In a closed economy, the issue is whether governments can fool
their electorates into believing higher growth is sustainable for a while
before domestic price inflation rises and the value of their real wages falls.
But in an open economy, with capital mobility, discretion also gives the
government the ability to fool international investors into believing that
growth will be sustained before the exchange rate — and therefore the
profitability of their investments — falls.
Do governments have this power? Some despair about the power of
“the markets”, arguing that it renders governments impotent in the face of
market judgement, making discretion impossible, full employment
unattainable, slow growth inevitable.11 The time inconsistency problem is
solved because governments cannot afford to cheat even for a short while
— because markets immediately punish any government which strays from
the macroeconomic straight and narrow.
The problem is that this argument is not borne out by either theory or
the international evidence: it ignores the theoretical point that, even with
free capital markets and perfect information, the existence of nominal wage
and price rigidities means that there is still a short-term Philips curve tradeoff which governments can try to exploit; but it also enormously overrates
the rationality and omnipotence of financial markets. It is precisely
because markets can sometimes be misinformed, short-termist, irrational,
speculative and herd-like that governments do retain the power of
discretion — for good or bad.
What is surprising, in retrospect, about the 1990s financial market
turbulence in the UK, Mexico or Thailand is not that exchange rates came
under pressure, but that governments were able to get away with
unsustainable policies for so long before their soundness came into
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question. And far from the markets homogenising economic policies by
preventing electorates from choosing different economic policies, what
remains striking is the diversity of economic policy across developed
economies. As a recent survey of the views of market participants shows,
market investors take a strong view of a relatively narrow range of
macroeconomic indicators, of which the current and projected inflation
rates and fiscal deficits are the most monitored.12 But these are just a few
of the many variables upon which economic policy bites and across which
there is wide variation even between European countries: the tax/spending
share of GDP, the corporate tax rate, the level of the minimum wage or the
toughness of competition law to name but four.
Far from rendering governments impotent or rewriting the laws of
economics, it seems to me that global capital markets actually render
government’s more powerful in their ability to do bad or good — the
main dimensions on which they have influence are scale and speed rather
than direction.
Governments which pursue monetary and fiscal policies which are
not seen to be sustainable in the long term, and, worse, attempt to conceal
the fact through short-term diversion or deceit while delaying the necessary
corrective action, are punished hard these days — and much more rapidly
then thirty or forty years ago.
When these crises hit, the effects can be hard and painful: high
interest rates and fiscal retrenchment to stabilise the macro economy; low
investment, fewer jobs and slower growth as a result; a halt to structural
reform and the wider economic agenda as the crisis consumes time, energy
and confidence; and contagion effects as — perhaps irrationally —
confidence slumps in the wider economic area or region. But there is also
a longer-term effect to be paid. Once such a mistake occurs, it can take a
long time to repair the damage, in terms of lost credibility, and so rebuild
the ability to deliver stability through discretion.
Recent examples are illustrative:
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The UK’s attempt to maintain its ERM parity in 1992 proved
unsustainable, in the face of growing evidence from the traded sector
and the domestic economy that the exchange rate and the level of
interest rates it demanded could not be maintained; while the
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speeches made by government ministers that the policy was central
to the government’s economic strategy, and the attempt to sell DMark denominated bonds to increase the fiscal cost of failure to
maintain the parity, only served to demonstrate the degree of
desperation and made it much harder to regain credibility once the
policy failed.
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Mexico’s attempt to have simultaneously a strong exchange rate,
large fiscal deficit and low interest rates was unsustainable; selling
short-term dollar denominated bonds to boost confidence probably
accelerated the crisis, and certainly made it worse when it hit.
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Similarly, the recent crisis in Thailand has at its heart a similar story
of a government which despite, and unlike in Mexico, repeated
warnings from the IMF, ran into balance of payments difficulties
because it tried for credibility purposes to maintain an unsustainable
exchange rate, compounded first by excessive credit expansion in a
financial sector which was not sufficiently regulated and supervised
so that non-performing loans accumulated, and then by an undeclared
policy of intervening heavily in the forward market to try to sustain
the exchange rate to preserve flagging credibility and confidence in
the long-term sustainability of policy. Ironically, when the authorities
were finally forced to publish their forward book, the crisis was
deepened in the short term because only then did it became clear
quite how unsustainable policy had become.
But governments which pursue, and are judged by the markets to be
pursuing, sound monetary and fiscal policies, can attract inflows of
investment capital at higher speed, in greater volume and at a lower cost
than even ten years ago. Witness the huge investment flows into Latin
America, China and South-East Asia over the past decade. Or the rapid
convergence of long-term interest rates in Europe as more and more
southern European economies have increased their perceived probability
of joining EMU.
Moreover, if governments are judged to be pursuing sound, longterm macroeconomic policies and institutional procedures, then they can
15
use discretionary monetary, or indeed fiscal, policy to deal with
macroeconomic shocks which need to be accommodated in the short term.
It was the fact that German economic policy making institutions were
judged to be credible in the long-term that enabled the Bundesbank to
accommodate the supply-shock of unification and effectively ignore its
favoured money supply targets. It was the fact that Alan Greenspan, as
chairman of the US Federal Reserve, had such accumulated credibility that
he was able to cut interest rates hard and early at the end of the 1980s
without destabilising the financial markets.
So we reach the second principle — credibility through sound longterm policies: in a world of rapidly mobile capital, governments can have
policy credibility and maintain constrained policy discretion if they pursue,
and are seen to be pursuing, monetary and fiscal policies which are well
understood and sustainable over the long term and where problems are
spotted and tackled promptly rather than disguised, while the government
clings to intermediate indicators to prop up credibility.
The problem with this second principle is that, while a step in the
right direction, it still rather begs the question of how credibility can be
achieved and the “time inconsistency” problem solved. Of course it would
be much better to be a government which preserves its power of discretion
in macroeconomic policy, has low long-term interest rates and has time and
space to focus on structural reform. Being truly credible means facing
“time inconsistency” down over time. The longer the track-record, the
greater the cost of breaking that record and therefore the greater the belief
that discretion is being used wisely. But how does a new government
establish such a track record? Does it simply have to wait, pay a short-term
cost and prove its intentions are genuine? Or are there actions it can take
to build credibility, short of fixed policy rules?
Let me pose two questions any government must answer:
The first concerns information: why should I believe you are
pursuing sound policies just because you say you are?
The second concerns reputation: just because you have been pursuing
sound policies in the past, how do I know you will continue to do so in the
future?
16
III.
Credibility Through Maximum Transparency
At the heart of the “time inconsistency” problem is imperfect information
— about the true state of the macroeconomy and, more importantly, about
the true motivations of policymakers.
Economics requires perfect information — about prices today and in
the future and about the quality of the goods you buy — in order to
produce first-best outcomes. But, as the great US economist, now Chief
Economist at the World Bank, Joseph Stiglitz has argued in numerous
articles over the past two decades, if that information is partial, and can
be manipulated, then often quite perverse outcomes can result. 13 The
consequences of imperfect information underpin much of the new
Keynesian research agenda, from failures in insurance or credit markets
through job-signalling and efficient wage explanations of unemployment.
At its simplest, it is captured in the classic prisoners dilemma, where two
isolated prisoners cannot trust each other to co-operate and plead guilty,
which would make them both better off, because of the risk that one pleads
guilty while the other cheats and pleads not guilty. So they both plead
not guilty and remain in jail — the worst outcome.
How does imperfect and asymmetric information affect
macroeconomic policymaking?
First, as I have said, at the heart of the time-inconsistency problem is
inevitable uncertainty about the true motivations of policymakers — about
whether their claims to be pursuing long-term sustainable macroeconomic
policies are genuine.
But this problem is compounded by imperfect information about the
state of the economy and policy actions which are being taken. Discretion
for macro-policymakers would be straightforward if it were always
immediately clear what discretionary action was needed and why and when
action was being taken. If it was always clear what the level of the output
gap was, or the underlying rate of productivity growth, or whether a
particular shock was a supply shock to be accommodated rather than a
demand shock to be countered, life would be easier.
The problem is that the suspicion that the government is manipulating
information or policy for short-term motives is as damaging to credibility
and the economy as evidence that it has done so. Even if macroeconomic
17
errors begin as mistakes rather than deliberate deception, the more
suspicion there is about motivation, and the greater the asymmetry of
information between government and the investing public, the higher shortterm cost that is paid in lost credibility and the heavier the blow to
credibility when things go wrong.
There can be no doubt that the UK paid a price in lost credibility
because of the macroeconomic mistakes of the 1980s. But there is no need
to suggest that this was the result of deceit. Hubris is as serious a risk.
Who can be surprised that a chancellor who, after declaring that an
“economic miracle” was occurring for some years, came to believe his own
rhetoric and over-estimate the capacity of the economy to sustain higher
levels of growth — only to find his miracle to be rather less significant
than he hoped and inflation accelerating out of control?
The last few years show that credibility in macroeconomic
policymaking is a valuable commodity — once promises on tax, borrowing
or interest rates are broken it is hard to rebuild credibility in future
promises. And without it, the economy pays a higher price in terms of
higher long-term interest rates, slower growth and a constrained ability to
use discretion when it is really needed.
But the less the public knows about how decisions are taken, the
more suspicious it inevitably will be about motivation and the more the
risk of the kinds of market turbulence that can occur when information is
incomplete and policies are not well understood. The more economic
information that the government withholds from public scrutiny, the
greater the suspicion that there is a truth which is being withheld and the
books are being cooked. And when discretionary action is needed, the less
the public is taken into the confidence of policymakers about the nature of
the policy dilemma, and the risks associated, the harder it will be to
maintain credibility and support if things do not turn out as anticipated.
This information problem is compounded when the possibility of
bail-out by international institutions exists. It is clear that the willingness
of the International Monetary Fund, backed by national governments, to
provide rapid financial assistance to Mexico in 1995, helped to stabilise
that crisis and limit the domestic damage. The need to maintain the
capability for rapid financial assistance has been even more apparent in
recent months as the crisis in Thailand, clearly the result of policy errors,
18
has spilled over into a loss of confidence and market turbulence more
generally across South-East Asia. The loss of financial market confidence
in Indonesia in recent weeks, and the stabilising effects of the swift and
substantial assistance from the IMF, shows both the speed with which
contagion can spread, the way in which unsustainable policies can be
quickly exposed, and the worth of the international institutions.
But the willingness of the IMF to play this “bail-out” role also has
a cost — the more the IMF is willing to step in to bail out failure, the less
private capital and national governments have to suffer when problems
occur, and the less vigilant they need to be in avoiding crises in the first
place. Or, to use economists’ jargon, this moral hazard problem reduces
the risk premium which investors demand from potentially vulnerable
countries at the expense of a greater risk borne by those who finance the
international institutions. Which is why the international institutions, and
their developed countries financiers, have an interest in greater
transparency in all countries so that proper surveillance can occur and
unsustainable problems are not hidden from view. This is one motivation
behind the proposed IMF Code of Conduct I referred to earlier.
So the third principle is — credibility through maximum
transparency: the greater the degree of transparency about the
government’s objectives and the reasons why decisions are taken, the more
information about outcomes that is published as a matter of routine, and
the more checks on the ability of government to manipulate the flow of
information, the less likely is it that investors will be suspicious of the
government’s intentions, the greater the flexibility of policy to react to real
crises and the easier it is to build a consensus for difficult decisions.
This principle takes us part, but not all of the way, to credible
discretion. It helps guard against the hubris trap. And by making more
information available to the public and the markets not only about longterm objectives, but the short-term state of the economy and policy, it
makes “cheating” on policy mistakes less likely, and more costly — so
helping to ease the time inconsistency problem. But it does not alone solve
the problem. Indeed, cynics would argue that the more the government does
to persuade the markets and the public that it can be trusted, the more it has
to gain in the short term from cheating. Which is why we have to turn to
19
a further strand of economic theory, implicit in the preceding discussion of
credibility and discretion, which underpins the final principle.
IV.
Credibility Through Pre-commitment
The existence of asymmetric information about the government’s motives
explains only half of the problem which central bank independence is
designed to solve. The second is that we live in a dynamic world in which
reputation matters. The tragedy of the prisoner’s dilemma is not simply that
they choose the second-best outcome, but that they cannot learn from their
mistakes. Each time they are offered the opportunity to gamble on mutual
co-operation, it is a gamble they dare not take for fear that the other will
continue to cheat. If only there was a way in which they could both precommit to plead guilty, then the dilemma would be solved.
The same applies to governments. The problem is that the
government can get away with cheating once, by claiming that discretion
is needed to respond to a shock when all that is intended is a short-term
pre-election dash for growth. For it does so at the cost of its reputation in
the future. You can only fool people once. But once you have, the public
and markets expect it again. And again.
The problems which continued to undermine the credibility of
economic policy after the UK left the ERM make this point. The
government tried to focus on the long term — by setting an inflation target
against which it could be judged. It tried to be more open in the provision
of information — the minutes of the new monthly meetings between the
Chancellor and Governor were published, and the Bank produced a new,
quarterly Inflation report which provided much more information about the
state of the economy and the stance of policy. Yet, once the Governor and
the Chancellor began to disagree, there was widespread suspicion that this
was simply pre-election political manipulation of interest rate policy —
certainly enough suspicion to keep long-term interest rates high and make
companies more wary about investing.
The answer is to put in place institutional mechanisms which mean
that it is clearly the government’s intention to do the right thing — to
make, in the jargon of game theory, a strategic pre-commitment. Part of the
20
solution, as principle III suggests, is to give so much information about the
government’s objectives and whether it is meeting them, that it makes
failure to take a long-term view too costly to contemplate. But it is also
possible to go further — to pre-commit not to cheat and dash for growth
while retaining the discretion which is lost with fixed policy rules.
Which is, of course, the heart of the case for central bank
independence as a solution to the time inconsistency problem, as made by
Robert Barro and Robert Gordon in the early 1980s and more recently and
most eloquently by Stan Fischer, Managing Director of the IMF.14 The
government, by legislating to make the central bank independent in setting
policy to deliver low inflation, can strategically pre-commit policy to
meeting that objective while still preserving the discretion for monetary
policy to respond flexibly to shocks. Central to the ability of the
Bundesbank and the US Federal Reserve to use discretion in the late
1980s, as I outlined earlier, was the fact that they could do so without
suspicion that they were manipulating information or policy for short-term
political reasons.
And so we reach the final principle — credibility through precommitment: the more institutional arrangements can demonstrate that
policy is truly trying to achieve its declared objectives, and the more
difficult it is for the government to cheat by breaking promises or aiming
for different objectives, the more the public and investors will believe that
decisions are being taken for sound long-term reasons.
There are, of course, a range of types of “independence” depending
on how the bank is constituted, whether the government or the central bank
sets the targets for policy and the degree of openness in its deliberations.
The arguments I have made tonight do not necessarily make the case for
one particular model over all others but they certainly give a steer. In
particular, credibility through maximum transparency applies, in my view,
at least as much when the central bank is independent. Putting aside the
more political arguments about the need for democratic legitimacy, and the
need to ensure that the government and central bank are seen to be united
on objectives, the argument for maximising discretion by explaining to the
markets and the public why decisions are being taken and for what purpose
strengthens credibility of policy whether in the hands of the government
or the central bank.
21
The same institutional arguments apply also to fiscal policy — but
necessarily to a lesser extent. The goal of monetary policy is relatively easy
to codify: governments can sensibly set the inflation target but then devolve
decision-making over interest rates to an arms length monetary agency
which is charged with achieving that goal. But setting targets for public
borrowing and then asking a fiscal agency to make the necessary decisions
to meet those targets would be much more difficult. The reason, of course,
is that public borrowing is the difference between two much larger
variables — taxes and public spending. And decisions about how much and
who to tax and how much and how to spend affect not simply the level of
public borrowing, but a much wider set of economic and social objectives,
not least the distribution of income and wealth across society and between
generations. It is precisely to make these choices and trade-offs, about ends
and means, for which governments are elected — trade-offs which, unlike
the supposed long-run trade-off between unemployment and inflation, are
not spurious but real. But there are ways in which a government can
preserve its ability to make these fiscal choices and yet also buy credibility
by making pre-commitments to long-run targets, open procedures and
institutional constraints, as the new Labour Government is demonstrating
and to which I now turn.
3.
PRINCIPLES INTO PRACTICE —
MACROECONOMIC FRAMEWORK
THE
NEW
UK
Establishing and retaining credibility is important for any central bank or
government — but particularly for a new government from a political party
which has been out of power for almost two decades and which has seen
substantial changes in its party constitution and policy in a short space of
years. So in my final section, I will try to use these four principles:
C
C
C
C
stability through constrained discretion
credibility through sound long-term policies
credibility through maximum transparency
credibility trust through pre-commitment
22
to explain the motivation behind the government’s different reforms to
macroeconomic policymaking.
The first, and certainly most important, economic reform that the new
government has introduced is operational independence for the Bank of
England and the accompanying reforms — the new monetary framework
— which the Chancellor announced in his letter to the Governor of May
6th. Taken as a whole, this new framework puts all these principles into
practice, as I will explain.
The Bank of England will be charged, under the legislation, to set
monetary policy to achieve price stability as defined by the government’s
inflation target — not a fixed intermediate target — of either the monetary
or exchange rate target. So through this institutional reform, the
government is now pre-committed to a monetary policy which aims to keep
inflation low and, without prejudice to that objective, to support the
government’s objectives for growth and employment. But this secondary
objective, combined with the precise formulation of the price stability
objective as a target of 2.5 per cent on average, is important because it
makes clear that the Bank has discretion to respond intelligently to supplyside shocks — a discretion which is further underpinned by the new “open
letter system” which ensures that this discretion is exercised in an open and
transparent manner.
There is no doubt about the government and the Bank’s sound longterm objectives. The inflation target makes clear that the objective is to
achieve, on average, an inflation rate of 2.5 per cent measured by the
underlying inflation rate. And it is the Bank’s primary role to achieve that
objective, without any government over-ride except for very exceptional
circumstances. The separate fiscal task of managing the government’s debt
will be the job of the new debt management agency, while banking
supervision will be the task of the new SIB. There is now no risk of mixed
motives or reputational contagion between supervision and monetary
policymaking while the Bank is responsible for “financial stability”. As
lender of last resort, responsibility for avoiding problems in the first place
is SIB’s and the risk of moral hazard is gone.
These new institutional arrangements also maximise openness and
transparency. The Bank’s new Monetary Policy Committee meets monthly
to set interest rates to meet that objective, the minutes of which are
23
published with a six week delay and which, if there were a vote, would
include the votes cast. The Bank publishes a quarterly inflation report
which explains its view of the economy and how it is setting policy to meet
that objective. The Governor and Deputy Governors will appear regularly
before the Treasury Select Committee to explain their actions. The
reformed Court of the Bank will be responsible for the Bank’s finances and
there will be a debate in Parliament each year on the Bank’s annual report.
The forward book of the government’s foreign exchange rate transactions
will be published with a lag, and the Bank will follow similar procedures.
But, importantly, the new arrangements also preserve discretion —
constrained by the inflation target. Policy is aimed at achieving an inflation
rate of 2.5 per cent. But if the actual inflation rate were to go more than
one percentage point either side of that target, then the Governor would
write an open letter to the Chancellor explaining why this has occurred,
how long it is expected to persist, the action the Monetary Policy
Committee has taken and is taking to get inflation back to the target and
how this is consistent with its objectives. This “open letter” is critical for
two reasons. First, because it makes clear that the Bank and government is
at all times committed to the long-term low inflation policy. But second,
it allows the Bank, in full public view with government support and
entirely consistent with that long-term aim, to respond when necessary with
discretion to the kinds of supply-side shocks I spoke of earlier without
paying a high price in terms of lost output.
So the new arrangements are in line with all the four principles.
Stability through discretion is preserved. The long-term, soundness of
policy is unquestioned. Openness and transparency are maximised. And this
is enshrined in new and credible institutional arrangements, set out in
legislation.
So too with fiscal policy. The government in its first Budget set out
a five year deficit reduction plan to achieve sound public finances. Policy
is set to achieve clear and unambiguous fiscal rules: the Golden Rule and
to hold the ratio of debt-to-GDP at a stable and prudent level over the
economic cycle — rules which, unlike under the previous government,
cannot easily be changed as the cycle progresses. Moreover, while the
government is pre-committed over the cycle to deliver sound long-term
fiscal policies, both the automatic stabilisers and the discretion to use
24
fiscal policy, if necessary, to respond to an economic shock have been
preserved.
In order to reinforce this long-term focus, openness and transparency
is being increased in fiscal policy. July’s new Red Book also included
information that the government has never published before which reveal
more information about the government’s view of the state of the economy
and the public finances. First, the government published cyclically-adjusted
estimates for the fiscal deficit — designed to avoid the kinds of errors
made in the late 1980s by revealing publicly the government’s best view of
the underlying state of the public finances. But in order to introduce a bias
towards caution, the government published two views of the output gap —
a central case and a more cautious case, and cyclically adjusted deficit
numbers based on both scenarios. This was only a beginning. In a matter of
weeks, the government will publish the first ever National Asset Register
which, alongside the Golden Rule and eventually the capital/current
distinction which will be offered when resource accounting and budgeting
begins, will break greater transparency and rationality to the government’s
capital budgeting. And a few days later, the government will, for the first
time, publish a Pre-Budget Report which will encourage a debate about the
state of the economy and public finances and the government’s economic
policy agenda in advance of the March Budget.
Finally, the government has taken institutional steps to increase fiscal
policy credibility. The National Audit Office was asked, before the Budget,
to report on changes in the conventions that the government was planning
to ensure that decision-making was based on sound assumptions which
have not been manipulated. The NAO will have a continuing role in future
Budgets. And the government has committed to publish, each year, the
IMF’s conclusions of its staff visit to examine the government’s economic
policy, including its Budget judgements.
4.
CONCLUSION
So in fiscal policy, as in monetary policy, the government has acted early
to boost its policy credibility. Discretion has been preserved. A sound long
term basis for policy, with clear targets, has been established. Policymaking
25
is more transparent than in the past. And institutional changes, at the Bank
of England and with the new role for the NAO, guarantee this long-term
commitment to stability will be maintained.
Will this make for better policy? Only time will tell. Clear principles,
sound institutional reforms, and a genuine commitment to transparency and
accountability, create the conditions for better policymaking. But, as I said
at the beginning, it is results that count. Outcomes speak louder than
reforms.
26
ENDNOTES
1.
Chancellor of the Exchequer’s Statement to the IMF Interim
Committee meeting, Hong Kong, 21 September 1997.
2.
Letter from the Chancellor of the Exchequer to the Governor of the
Bank of England, 6 May 1997.
3.
Chancellor’s speech at the Mansion House, 12 June 1997; Budget
Speech, 2 July 1997; Red Book, July 1997.
4.
Romer P. (1986), ‘Increasing Returns and Long-Run Growth’,
Journal of Political Economy, 94(5), October; Boltho A. & Holtham
G. (1992), ‘The Assessment: New Approaches to Economic
Growth’, Oxford Review of Economic Policy, 8(4) Winter.
5.
Financial Market data at close of London markets, 21 October 1997.
6.
Blanchard O. J. & Summers L. H. (1990), ‘Hysteresis and the
European Unemployment Problem’, in L.H. Summers,
Understanding Unemployment, Cambridge, Mass: MIT Press.
7.
See, for example, Britton A. (1991), Macroeconomic Policy in
Britain 1974-1987, Cambridge: Cambridge University Press.
8.
I am grateful to Mervyn King who suggested that I add the word
“constrained” to the original description of the first principle
“stability through discretion”, a term he used in his 1997 LSE
Financial Markets Group lecture “The Inflation Target — Five Years
On” (29 October 1997) and which better captures the fact that the
Bank of England exercises discretion only within the constraint of
the inflation target.
9.
King M. (1995), ‘Credibility and Monetary Policy: Theory and
Evidence’, Scottish Journal of Political Economy, 42(1), February.
10.
Kydland F. E. & Prescott E. C. (1976), ‘Rules rather than
Discretion: The Inconsistency of Optimal Plans’, Journal of Political
Economy, 85(3), June; Lucas R. E. (1976), ‘Econometric Policy
27
Evaluation: A Critique’, Carnegie-Rochester Conference Series on
Public Policy, 1(2).
11.
For example, Marr A. (1995), Ruling Britannia: The Failure and
Future of British Democracy, London: Michael Joseph.
12.
Mosley L. (1997), ‘International Financial Markets and Government
Economic Policy: The Importance of Financial Market Operations’,
unpublished paper prepared for the 1997 Annual Meeting of the
American Political Science Association, Duke University August
1997.
13.
Stiglitz J. & Weiss A. (1981), ‘Credit Rationing in Markets With
Imperfect Information’, American Economic Review, 71 (3), June;
Stiglitz J. E. (1994), Whither Socialism?, Cambridge, Mass: MIT
Press.
14.
Barro R. J. & Gordon D. (1983), ‘Rules, Discretion and Reputation
in a Model of Monetary Policy’, Journal of Monetary Economics,
12(1); Fischer S. (1994), ‘Modern Central Banking’, in F. Capie, C.
Goodhart & N. Schandt (eds), The Future of Central Banking,
Cambridge: Cambridge University Press.
28
REFERENCES
Barro R. J. & Gordon D. (1983), ‘Rules, Discretion and Reputation in a
Model of Monetary Policy’, Journal of Monetary Economics, 12(1).
Blanchard O. J. & Summers L. H. (1990), ‘Hysteresis and the European
Unemployment Problem’, in L.H. Summers, Understanding
Unemployment, Cambridge, Mass: MIT Press.
Boltho A. & Holtham G. (1992), ‘The Assessment: New Approaches to
Economic Growth’, Oxford Review of Economic Policy, 8(4)
Winter.
Britton A. (1991), Macroeconomic Policy in Britain 1974-1987,
Cambridge: Cambridge University Press.
Fischer S. (1994), ‘Modern Central Banking’, in F. Capie F., C. Goodhart
& N. Schandt (eds), The Future of Central Banking, Cambridge:
Cambridge University Press.
King M. (1995), ‘Credibility and Monetary Policy: Theory and Evidence’,
Scottish Journal of Political Economy, 42(1), February.
Kydland F. E. & Prescott E. C. (1976), ‘Rules rather than Discretion: The
Inconsistency of Optimal Plans’, Journal of Political Economy,
85(3), June.
Lucas R. E. (1976), ‘Econometric Policy Evaluation: A Critique’,
Carnegie-Rochester Conference Series on Public Policy, 1(2).
Marr A. (1995), Ruling Britannia: The Failure and Future of British
Democracy, London: Michael Joseph.
Mosley L. (1997), ‘International Financial Markets and Government
Economic Policy: The Importance of Financial Market Operations’,
29
unpublished paper prepared for the 1997 Annual Meeting of the
American Political Science Association, Duke University, August.
Romer P. (1986), ‘Increasing Returns and Long-Run Growth’, Journal of
Political Economy, 94(5), October.
Stiglitz J. & Weiss A. (1981), ‘Credit Rationing in Markets With Imperfect
Information’, American Economic Review, 71 (3), June.
Stiglitz J. E. (1994), Whither Socialism?, Cambridge, Mass: MIT Press.
30